2006-03-30

This follows some commentary discussion on my previous post, Li Yi on Apple Daily. You can also see my personal opinion on the Taiwan issues.

I found it impossible to follow the logic of the first essay (today's Apple Daily), and I agree 90% with the second one (Mar 6 2006 HKEJ). Both started from a premise of pro-DPP point of view. In Chinese I would say 两文相较,高下立见(the winner emerges with no ambiguity).

The problem with Essay 1:

What is wrong with trying to appease all sides of the voters? Isn't this what democracy is about?

What is wrong with MYJ's objecting to TI himself while accepting it if people choose it?

How do you know MYJ will 'refuse to invest in defense'? Even if so, why less defense in Taiwan will result in the strengthen (in absolute terms) of the mainland? In relative terms there may be, but Pu Tachung was implying the absoulte terms.

Essay 2 has small fault in facts, but the logic is basically coherent

Many HK'er are not sympathetic of TI. It is not that they do not dare to speak out. (But he is right that some are)

CSB's "Am I wrong" was not exactly about giving the rights back to the people. It applies to a lot of issues and implications of his 'cease to operate' order

Other than that, it is hard to find logical faults like Essay 1

It is Pu Tachung's head that needs to be fixed, not MYJ's. Jimmy Lai is a very smart man, but he needs to take a break, and straighten his logics to avoid the complacency.

The HKEJ columnist demonstrates what I called in "successful arguing without twisting the logic". AD HK can achieve Lai's objective without looking like a liar and expend all hard-earn credibility.

2006-03-28

Li Yi is one of the few writers still with Appel Daily that I would respect, after Wang An-ran was purged. He echoed (see also cache below) with Lin Huai-min's comments on Taiwan media, in particular Apple Daily and Next. (Update: ESWN translation available now)

His reasoning for why Nextmedia in Taiwan has been so successful is similar to what Lin and I agreed on in the linked post above, centrist and unbiased position, and unpretentiousness (in Lin's word, by "not trying to dance while wearing business suits").

Let me spell out the obvious that Li Yi implied, Apple Daily in HK failed to accomplished this, big time. That explains the difference in performance.

Stephen Cheung gave a more recent example (cache below) for split personality of Apple Daily HK, by comparing the contrasting opinions of Martin Lee and Yeung Wai Hong on ther formation of Civic Party in HK. IMO it is good for Next to show difference in opinions, but it is unfortunately that these 2 points of views (esp that of Lee's) are not fully objective or neutral.

In the risk of offending the religious clans, I am going to say why I am annoyed at Apple Daily's coverage of Joseph Zen in Vatican recently. Well, Lai is a catholic and he went to Vatican, so Zen occupied the full frontal of Apple Daily for at least 3 consecutive days, despite the fact that catholics are hardly the majority in HK, or represents the readsership here. The dosage was too much for me.

One problem is the preaching that the Holy See and its followers represent the hope of democracy and freedom for HK and China. Why? if Vatican represents democracy, then HK is already one. The pope is elected by a group of cardinals who have been appointed by the previous pope. The CE of HK is elected by 800 electors who represents, well, YKW. See the similarity? The politburo and the People's Congress in the mainland are also produced in a process similar to the Vatican experience.

The bigger problem for Apple Daily, when it turns itself into a propaganda machine, is the lost of credibility. I remember when I saw full 4 pages of attack on a judge in Oriental Daily (I just boarded a Dragon Air plane from Beijing), I thought I picked up something from FLG. I never trusted Oriental Daily from that day. It would be sad if Apple is down down the Oriental Daily way.

Back to business issues, I do not see much opportunity for the growth of Apple Daily in HK. This is not a criticism on its political stance, but when a business is dictated by politics, it cannot adhere to a coherent business strategy. One of the reasons for the success of AD TW was perhaps due to the fact that the leadership are from HK, who can look at Taiwan with fresh eyes. Maybe it is time to send some Taiwanese to run AD HK?

If Nextmedia will spin out the Taiwan operation, I will long Nextmedia TW and short Nextmedia HK.

---

P.S. Stephen Cheung provided another piece of great insight, when he compared China and India in his column. Cheung does not think democracy will help the development of poor developing countries, but he recognizes the merit of democracy and does not object to democracy in the future

Although non-democratic (authoratative) leadership in China proved to be a successful recipe for economic development, there is also major risk when it gets wrong (as there is no check and balance)

However, Cheung still thought China should have taken the way it took in the past 20 years. His reasoning was formed back 1980s, back then China was at the abyss, so that it was unlikely to become worse by gambling big (in the authoratative path), and that the gamble was worth taking

What this implies is that, as China develops, there is more to lose by betting on authoratative leadership. It is a delicate calculation to predict at what point one should shift into democratic gear. There is no clear answer yet, but we do have one successful example, South Korea.

2006-03-27

Each time CSB try to provoke the government on the other side of the strait, CCP seems unable to find an appropriate answer, i.e. either way they lose. Well, until recently. Apparently A Bian crossed the line and US stepped in the most recent battle (NUC incidence).

On the other hand, CCP finally found an effective PR offense, the panda politics. A few lame excuses has been provided by the deep green camp to resist the panda. They even called them Trojan panda and I believe they honestly fear these harmless cuties. Why? because pandas will be visited by voters, especially those belong to neither camps, and that would remind them that people in mainland are not as hostile to Taiwan as preached by DPP.

In a desperate attempt to stop the pandas coming, A Bian recently tried to distort the message from a book he read, basically saying, no wild animal should be taken in a zoo, therefore panda should be released to the wild. Besides the obviously logical flaw (what about other animals in Taipei zoo), this was quickly refuted by the original author of the book (see HK Economic Times, link requires subscription, or here: 陳水扁(新聞)總統指稱看了潘文石的主張後，認為應野放貓熊回山林，但潘文石的主張為：反對野生貓熊[圈養]，推動[人工繁殖的貓熊]動物園圈養；人工繁殖的貓熊是沒有野放山林的問題；送台灣的貓熊是人工繁殖的；台灣絕對有能力養好貓熊。李慶安認為，大陸送台灣的貓熊，是圈養而非野生，若野放山林會無法生存，陳總統講錯了卻不認錯。), who clarified that the pandas in capitivity are all injured animals who requires care, plus their offsprings who may not have the skill to survive in the wild. i.e. keeping these particular pandas in zooz does not affect those living in the wild. To the contrary, they would not have survived or been bred otherwise. In addition, showing them outside mainland China helps to raise awareness of conservation, provides a better environment for the pandas and (in the case of other zoos outside Greater China) helps to raise fund to maintain the sites in Sichuan.

I believe CSB will reject the panda with various excuses eventually. However, they cannot stop them by 2008, if there is a change in government. The more the CSB government keeps its misguided ideology over its responsibility to deliver what the voters want and loses the PR battle, such changeover becomes more likely.

I do have one suggestion for CSB. Take the pandas and keep them in a small zoo up the mountain, i.e. at an altitude of 1500-3000m, say near A Li Shan. This way Taiwan does not have to build the expensive air conditioned room like HK did. It also addresses the issue of 'natural habitat/temperature'. Most importantly, for A Bian, the panda zoo is hard to access by the public. The impact on DPP vote erosion would be minimized, while at the same time he does not have to take the bigotry response and hence avoid the PR fiasco. This would be a win-win for DPP's PR, its political agenda, and the Taiwan people.

2006-03-25

At the China Development Forum, I challenged Chairman Ma on the execution of this strategy, asking him point blank how China expects to spark a dynamic consumer culture in the face of a daunting sense of job and income insecurity that appear to be unavoidable outgrowths of ongoing reforms. My question: “Don’t the massive headcount reductions brought on by the continuing dismantling of a state-owned system make it very difficult for China to count on a pro-consumption growth dynamic?” Chairman Ma’s response was both candid and very wise. He stressed four keys to success for China’s shift to an increasingly consumer-led growth dynamic:

(1) Income support -- always the main driver of consumption -- will be directed at the lower end of the pay distribution, especially in rural and agricultural China.

(2) The safety net will be emphasized as the means to cope with consumer insecurity and the related excesses of precautionary saving; this implies heightened emphasis on social security, educational, and healthcare reforms.

(3) Emphasis will be placed on improving the retail distribution network; this is a physical infrastructure issue (i.e., roads and rail) but also a commitment to expanding China’s retail and wholesale trade establishments -- part of a broader set of services-based growth initiatives.

(4) Improving the quality of the Chinese consumption experience is also a major focus; this includes initiatives on land-price reform, enforcement of hazardous product regulations, and tilting export growth away from the low-labor-cost production model.

Note Ma Kai's careful ordering, esp point number 1. As anyone who has been to Chinese cities in the past 5 years, be it Shanghai or Lanzhou or even small cities such as Yanbian(Jilin), Yingtan(Jiangxi), you would observe people buying and selling consumer goods, and apartments. So where does the 'lack of consumerism' come from? My hypothesis

As for all other Asian cultures (e.g., HK, Korea, Thailand, Japan), Asians tend to save more than Westerners

On top of that (Chinese saves even more than their Asian neighbors recently), income disparity. The super-riches do not have much to spend, they are as rich as their counterparts in US in nominal terms and things are much cheapers in China

So, as Roach anticipates, it would 'take a good deal of [time]'.

Well, if someone prefers to work very hard and give you what you need at a price lower than you want to buy, and he does not eat and does not want anything in return from you, what is it there to complain? As a sensible businessman and intellectual, Roach is more concerned about the potential pitfall due to unbalanced growth.

Then Roach turned to observe the three stooges amigos' China sojourn. I am sure Mr NVR would enjoy this.

Chuck Schumer is a very smart and savvy man. He is using the bully pulpit of a prominent politician to put so much pressure on China that it will have no choice other than to give. Nor does he have much doubt that this approach will work. “This is exactly what I did in Japan in 1986,” he said -- apparently the last time he was in Asia. “It worked in Japan and it will work in China.” Senator Schumer is not Reed Smoot -- Utah’s protectionist senator who co-sponsored the Smoot-Hawley Tariff Act of 1930 that led to the Great Depression. In the end, Schumer doesn’t want tariffs -- he wants to go down in history as the man who made China blink. But he is perfectly prepared to play high-stakes political poker in order to achieve this objective. So is the rest of the US Congress. The big risk is that China calls Washington’s bluff and the two parties start to stumble down the very slippery slope of trade frictions and protectionism.

While the senators claimed they were there to listen and learn, my guess is that this was a classic window-dressing sojourn. As I probed them on the issues, they had all the answers down pat -- their minds were made up. Schumer actually conceded the point on the structural macro linkage between the trade deficit and the national saving problem -- a first for a major China basher. This, of course, has been a major leg of my own macro stool for longer than I care to remember. “I agree with you,” he said, “America doesn’t save enough and we consume too much.” Fine to that point, but then he turned the logic inside out: “I care deeply about the loss of US manufacturing jobs to China. If I am successful in cutting our trade deficit with the Chinese, not only will those jobs come back home but I will have succeeded in boosting US saving and cutting excess consumption. My bill can do all that and more.” I am rarely speechless, but at that point, I started to choke on a huge bite of watermelon. “Let me get this straight,” I gasped, “tariffs will boost saving?” Too late -- he was already off to face the ever-present battery of cameras and microphones.

I have met and chatted with Lin for a fairly long time (he was trapped in an airport lounge and a plane with me). I have great respect for him, more so after reading this. There are indeed many in Taiwan who are not simply Green or Blue. There are people who can think critically and who are fair to both extremities in the political camps. Lin is one of them. Lee Yuan Tseh is the other. (They are both Benshengren, and Lee was pivotal in sending CSB to presidency in 2000)

United Daily was a great paper, especially in literature and culture. Lin, as perhaps the most respected artist in Taiwan, was heartbroken to see the decline of such a great paper as it became a "Deep Blue" party organ.

United Daily is the sister paper of China Times. In the past China Times is a centrist light blue paper, while United Daily has always been Bluer. United has been very strong in art, literature and culture. This is also a market positioning issue. As China Times becomes bluer, the positioning of the two has bigger overlap. Sooner or later they would suffer from the same fate as their Evening counterparts. It makes more sense if they keep CT as a Blue organ, and shift United to the center. Because Apple Daily has already taken the centrist position (one of the reasons that AD TW will be more successful than AD HK). It is better to move United (than CT) because United has a edge over AD on culture/art areas, and the artists/academics are usually less political.

p.s. Forget the English blogs in Taiwan, or Taipei Times, or China Post, most of them are foreigner's propaganda for DPP (correction: China Post is propaganda for KMT). Read Lin Huai-min and Lee Yuan-Tseh.

Quick comments (will come back to update this later):1) Persek is right that China's decision on RMB should be based solely on the interests of its people, and that the consensus is that letting it free (or freer) will benefit the Chinese people. However, while agreeing that reforming RMB is for China's own good, I disagree with his "leading Asia" reasoning. China does not (and should not) seek to lead Asia at this point of time. China has a lot to worry about its own economy. If one manage herself well, she is regarded as a leader, naturally. If one tries to lead, it often results in the oppoosite. How China arrives at where it is today is because it has been able to (or luckily) avoid the many traps in growth of this size, not because it planned to lead.2) I also agree with O'Neil's argument. One can look at Alcoa's track record to see O'Neil has a lot of credibility.3) Question for discussion: should the recent decline in trade surplus change the RMB policy? Stephen Cheung said currency should stick to its presumed purpose, i.e. a medium for exchange of goods and services. A good policy should stick to a simple peg or scheme, and should not be 'manipulated' (appreciation of depreciation for any political reason is manipulation)4) I am not sure how to interpret the trade data yet, the report does not talk about seasonality, which is a pity. But Brad Sester offers some great insights.5) Stephen Cheung also said (below) that Zhu Rongji's RMB is better than what it is today (i.e. before 7/2005 is better than after). I do not understand the his full reasoning, but I tend to agree with him. My reasoning is mainly, today's so called 'basket peg' is hardly a basket, as you can see in this research: a phenomenological study based on data from 7/2005 to 3/2006, USD represents 99.965% of the basket!

2006-03-10

Stephen Cheung continues his series on basket peg. I hope he (and Jimmy Lai) do not mind me reproducing it here. I believe the discussion would generate higher impact if it can be introduced to readers who cannot read Chinese, or are outside HK.

I will try summarize the rest of the key points later. (inside square brackets are inferences by me)

To minimize speculative fluctuation, include a higher number of commodities (say 30). It is just as easy because we have computer now [include 300 if you want] [This is one of the key reasons why we can do it today, but not before 1970. The other reason being an efficient market for commodity pricing and commodity futures.]

The weights can be assigned based on domestic consumption of respective commidities, no need to be too precise, as the purpose is to find an anchor that roughly reflects economic needs, not to model the actual demand

Content of the basket need to be transparent (this is a lesson after watching the RMB currency basket in the last 8 months, lack of transparency has led to instability and uncertainty in this period). The more transparent the content and its execution are, the higher the market confidence

The formula: very straighforward, just define how much of each commodity 10,000 RMB can purchase. e.g. 1 Liter gasoline + 2 kg rice + 1 kg cotton +....; also specify where and how the goods is delivered -- this is just to define the peg clearly, no one would really go to cash out the notes this way, but one can if he wants

The anchor (peg) provides a discipline for monetary supply. If RMB is over-valued, one may need to use the forex supply, but if it is undervalued, nothing needs to be done. [Alternatively, one can also use the forex to hedge in the international commodity market, by longing the respective commodities. This provides extra stability and confidence to the peg]

Choice of market: futures market and wholesale market. Choose both to diversify risks. Price update can be done every day, or even by second

The content can be revised from time to time [as demand changes over time]. On the day of switching, one can stick to the same weighted price index so that there is no change in value of RMB on that date [This has been discussed before. I would also note that the process need to be transparent]

In principle, the peg is to provide a measure for the currency, and should not be used for other economic planning purpose. However, if really needed, one can use this to specify inflation of, say 2% p.a., by adjusting the basket content accordingly, so that 10,200RMB can purchase the same basket a year later. [Perhaps this should be done daily? i.e. 2/365% per day? So that there is no abrupt changes in year end]

Now if there is external pressure for RMB appreciation, let whichever country to devaluate its own currency versus the basket.

I have maintained keen interests in this scheme mainly because it makes much more sense than what is on the market today. In addition, it reflects exactly what a currency is for, exchange of goods and services. Ideally one could also include services (labor) in the basket, but this is something hard to measure. Since wages is usually measured by the local currency, this would introduce a recurring loop into the formula. This is okay as the basket measure can be iterative. We can leave it to the next revision of the basket.

Lastly, I would like to say that not only China, the Euro, Yen, etc. may also switch to such a basket, with their own content. There is less need for smaller economies like Singapore and Switzerland, though I do not see why they cannot do the same (except it may be cheaper to operate a simple currency peg). The only except may be the USD, because USD is commanding a premium over all other currencies today and it may be more advantageous for US to keep the current scheme. However, if China, Russia, OPEC and Europe switch their scheme, there is less need in US Treasury Bond, the USD premium will decrease over time.

2006-03-09

It was proved that the Afghan hound Snuppy, cloned by Korean scientist Hwang Woo-suk's team, is for real.

It sounds simple, test the DNAs and see if they match, right?

Not that simple. It is easy to separate fertilized eggs (aka embryo cloning - for human being, it divides into as many as 32 embryos) and create identical twins (in theory one can create at most 32 twins this way). Then one can grow one cell to create the "mother" of Snuppy, and freeze the others to become he daughter Snuppy by waiting for a few years. The DNA are exactly the same but they are really identical twins.

However, if Snuppy is cloned, only the DNAs inside the nucleus are identical. There are DNA strain in the mitochondria. They do not contribute much to the organism's genetic information. But they come from the donor egg (which is different from that of the 'mother'). So the scientists tested both DNAs.

"We received blood samples from the donor dog Tai, the clone Snuppy and the surrogate mother who is a Labrador retriever," explained canine geneticist Dr Elaine Ostrander"We prepared DNA from those samples and then we tested them in two ways." The team looked at DNA in the cell nucleus and in mitochondria, components of the cell's outer structures.They found that only Snuppy's nuclear DNA matched with the donor dog, as expected. Snuppy's mitochondrial DNA did not match with the donor dog; this genetic material does not come from the animal being copied, but from the egg into which donor DNA is inserted. "The data really supports the notion that Snuppy is a clone of Tai, and that Snuppy was developed using the technical approaches that the authors suggested in their paper," said Dr Ostrander.

Therefore, it is concluded that Snuppy is innocent.

p.s. the technology of creating and 'archiving' identical twins leads to another controversy: i.e., can one create a back-up child before a child is born? (So that one can grow the frozen egg many years later, e.g. if the child dies of accident)

Via ESWN comes this essay on mainland China's strategy to Taiwan (寒竹：台海战略构想：和平制独，武力御外, with comments by 学渊点评).

The most interesting paragraph is this one below, that echoes the essence of my early posts, and that in How to pin Taiwan. The author proposed "appealing to 'peace' " as a strategy that addresses the fundamental cause (釜底抽薪，和平制独) of the conflict today. I agree.

Below are key points from the essay (inside [square brackets] are minor notes inserted by myself).

A grand wisdom [strategy] is required to tackle the current challenge. One should not act passively fighting word games with the TI'er on the island.

"Giving in" or "retreating" in a local battle is a key step to victory in a grand "warfare", as demonstrated by Duke of Jin Wen (Spring-Autmn Era 600BC), Kutuzov in 1812 and even Mao Zedong in Yanan.

Why the (mainland) Chinese government cannot attempt to dissolve [weaken] the TI support by taking the first step to 'give in'? Why can't the mainland government be more active and launch a "peace" campaign? (e.g.) What purpose do the missiles in Fujian [mainly Jiangxi, I think] serve? You cannot fire them to Taiwan any time soon, and the only result we can see is that it serves to push Taiwanese people further away. Why not move them away from the strait?

Internationally, why the mainland cannot be more "generous"? In issues peripheral to sovereignty, such as health, culture and commerce, why can't it give more space to Taiwan? or assist Taiwan in these areas when it is convenient [as it does with HK]? This way it can at least win some good will from the Taiwanese people.

Appealling to the Taiwan people with 'peace' is the (only) fundamental solution to the current quaqmire

These are fairly obvious to mostly everybody outside the mainland. I am surprised that they have not been taken seriously until now. I am also surprised that CCP bureaucrats have not thought about it. After all, they are not dumb. They managed to lead China to what it is today. This continues to puzzle me.

One of the reasons that has led to the support of TI is the total disappointment in any government from the mainland, from Qing, to Chen Yi, to Chiang Kai Shek, to CCP. The light green would rather take their own fate into their own hands. This is perfectly reasonable and understandable. To reverse the trend one has to address the source of the "problem", i.e., to show them that mainlanders have learned, they can manage a country, and they will respect their compatriots in Taiwan like their own brothers. Unfortunately, many in the mainland failed to understand this. They still maintain that any "reconciliation" will encourage TI, which is exactly the opposite.

2006-03-03

Stephen Cheung re-iterated that the basket commodity peg is the best option for RMB, simply because pegging to any other currency is pegging your fate to the person who manage that particular currency.

I would try to paraphrase him here (with a bit of inference from my own, but I am sure he would agree). China got lucky between 1994 and 2005 because Greenspan was able to manage the USD very well - with stability and low inflation. Even Greenspan could not guarantee such luckiness himself. Switching to a basket (as of today) only diversifies the risk, a foreign currency is still an indirect measure of value. It is not impossible that the whole basket (or Euro/Yen/USD which is almost the whole basket) rocks synchronously.

Pegging RMB to something which could measure the value of a currency more independently is always a better option than relying on how other people measure it. One of such better options is the commodity basket option. Although commodity is only a selection of the goods, and human intervention is still required in selecting which commodity into the basket, there are some objective rules, e.g. based on the amount the country consumes. This is especially true because commodity represents a large portion of China's own consumption, and China's consumption share in the world overwieghts its share of wealth. Most important of all, there is much less opportunity for bureaucrat to mess around with the rate, because it is more or less 'auto-pilot' once the basket is determined.

"... Our business in Taiwan is exceptional. The magazine as well as the newspaper both lead in sales. The sales price for Apple Daily (Taiwan) is not only highest in Taiwan (NT$15 compared to NT$10 for its competitors), but the sale figure is the highest too. This proves that our readers are largest in numbers as well as consumer power. For advertisers, these two strong points of Apple Daily (Taiwan) gave them an unmatched marketing channel. I am proud of the accomplishments of Apple Daily (Taiwan) and I am proud of Ip Yut-kin and his colleagues.

Last June, the research by A.C. Nielsen showed that Apple Daily (Taiwan) was the winner in sales in Taiwan. At the time, Apple Daily (Taiwan) was sold at NT$10 like its competitors. Two months later, I told the colleagues at Apple Daily (Taiwan) to raise the sales price to NT$15. At the time, they all opposed my proposal and even Ip Yut-kin was against it privately.

I absolutely understand why they think so: they had worked so hard to rise up to the number one spot in sales and the newspaper is profitable. So why take the risk? If the competition does not follow suit, then how could it not affect our sales? What happens if we can no longer keep the number one spot in sales? A newspaper makes money through advertising. Raising the sales price by NT$5 does not help the profit line much. The number one spot was not won easily, so one should not be hasty.

I understand their thinking. But as far as I am concerned, the most expensive and most widely circulated newspapers offers the advertisers a hitherto unseen marketing channel, and I longed for that. This absolute advantage is just too attractive and I did not want to miss out on this opportunity. So I told my Taiwan colleagues: "Don't worry. If the sales plummet after the price increase and I don't see any hope of keeping the price level at NT$15, I will return to the old price again." When they heard me say that, they finally agreed to let this mad man make the bet. Now, the sales figures for Apple Daily (Taiwan) is far higher than the competition and I can finally breathe a sigh of relief.

The results at Apple Daily (Taiwan) are exceptional, but I know that there is never a moment of rest in business. Apple Daily (Hong Kong) is facing a serious challenge. Prior to the appearance of the free newspapers, about a million newspapers were sold in Hong Kong every day. Today, there are a million free newspapers given out every day. How can the paid newspaper continue?

Recently, The Sun (in HK) reduced its sales price from HK$6 to HK$3, and this was another blow to us. The daily sales figures for Apple Daily (Hong Kong) has dropped from 360,000 to 310,000 or so. We are lucky to be able to sustain this level, and these results would not be possible without the talents and hard work of Tung Chiao and his colleagues.

I am confident that Apple Daily (Hong Kong) has the ability to overcome the challenges from this highly competitive environment. The market is not a zero-sum game. It is not as if the presence of free newspapers will cause the paid newspapers to die off. The market is a place for new creations, and the more competitive the environment, the higher the fighting spirit and creativity.There is an infinite number of free news sources on the Internet. If the news information business is won by sheer quantity, then the paid newspapers should have been swamped much earlier before the free newspapers ever appeared. Operationally, the paid newspapers in Hong Kong are undoubtedly facing a lot of pressure. This is just a necessary phase in the adaptation and improvement process. This is not a hopeless dead-end. The question is what we should do to overcome the current difficulties.

As I see it, the only solution is to reform -- to change our operational methods to fit the new competitive environment and to create more value for our readers and advertisers. ...

But I am more concerned that some of the Apple Daily (Hong Kong) colleagues are resisting the essential reforms; they tell me all day that "I feel that something is not right," "I don't think that we should act hastily until everything has been thoroughly thought through ..." and other ambiguous, abstract excuses. I know that reforming past habits is as difficult as a junkie getting off a drug habit, but we have no other choice.

Dear colleagues, please put aside your prejudices and face the challenge of the moment. Do not be afraid to make mistakes. If it is wrong, we can correct it. We will keep trying until we succeed. Okay? I will not give up reform. Please do not resist. Okay?"

Quantifying the "trade-off"

Lai is probably right in his reasoning. In fact, the price hike is probably a brilliant strategic move. However, he found it very hard to convince his team. This is not because his team is stubborn and dumb, it takes very talented people to create such a media empire. Instead, the fault lies in Lai himself. He was unable to communicate to his team clearly his strategy. Lai argued that one needs to make difficult choices betweeen action/tempo and a calculated strategy. He was right that we are faced with such tough decision every day. But he was wrong that this particular one is only justifiable by gut feeling and faith (on the boss). As a matter of fact, Lai made a costly mistake in his Admart (think "Webvan") venture during the dotcom era. The amount of information and analysis Jimmy Lai provided does not differ much in these two moves.

What Lai needs to do is a very simple analysis, to quantify the economic impact of the price hike

the price elasticity analysis, i.e. the impact of the loss in readship (d) if the price is raised from NT$10 to NT$15. This is the most difficult to predict. However, one can use a few scenarios to test the overall financial impact to Apple Daily. e.g. If readership drops by 33%, the total revenue is unchanged ( 5(X-d)-10d=0 if d=X/3). The profit actually improves because COGS is lowered. (one reference he could use is to use data he got when AD first entered Taiwan, when there was a price war)

#1 only considered the newspaper sales revenue. The larger revenue should be from advertisers (y), which is proportional to the readership. So a decrease in readership means the same decrease in ad revenue (yd/X).

The price premium Apple Daily can command, because of the readers who are willing to pay more (i.e. higher value customers). This can also be quantified (p x d). So one would need pd > yd/X to raise price.

where X is the current circulation, c the incremental COGS per copy, y is the ad revenue, p the % price premium for AD's CPM

assuming the ad revenue is calculated on CPM basis (in reality the relationship is not neccessarily linear)

In fact, if one uses this 'back of the envelope calculation', once can even go one step further, to determine the optimum price (whether it is 13 or 15 or 17 NT$), upon different price easticity scenarios, by maximizing the formula above. It only take a couple days for Jimmy Lai to perform the above analysis. He would have a good story to tell his team, and he would avoid the mistake of Admart. He already has most of the data handy.

Positioning under the challenge of free media

Jimmy Lai is correct in that Apple Daily's reader segmentation is different from that of the free papers. In fact, there was an overlap in terms of segmentation a few years ago, before The Sun entered the market. Oriental Daily launched a sister paper called the Sun to capture the price sensitive tabloid readers. Apple Daily's market share suffered then.

Today, the free papers (such as Headline Daily and Metro Daily) has the biggest overlap with the Sun, not with Apple Daily. My parents take 2-3 different free papers each days, but read them for about 2 minutes (the other implication, the CPM for free paper will be much lower in due course). They still purchase Apple Daily. In this example it is not a zero sum game, because AD's customer are spending more time reading papers, vs, eg, TV or bus ads. I would even go as far as saying that Apple Daily (perhaps other MSM such as Ming Pao, and most notably HK Economic Journal) will suffer much less than The Sun. I am also betting that The Sun will fold in about a year (or be downscaled and become free)! That could be rather good news for Jimmy Lai, because its major competitor, Orisun, is hurt most.

The free papers are just new entrants who found a new niche, by surviving entirely on ad revenue (handing out to readers for free). We can view them as no different from the entry of The Sun. I do not have the data, but if Jimmy Lai or his team is reading this, I would like to ask him to check the data when The Sun entered the market. I believe it is very likely that Apple Daily lost more market share back then. (Today, the loss in readership, according to Lai, is 50k/360k=14%)

What is the implication for Apple Daily? It should do some research in its segmentation and review its positioning. e.g.

give up some low-end tabloid content to save cost because its readers will get those from free papers anyway;

try to capture the segment of other paying customers (e.g. HK Economic Journal may lose some readers if it is swallowed by Richard Li);

try to command a premium in CPM, etc.

(Updated 2/28) ally with a free paper (e.g. AM730), to include a copy in each copy of AD. AAD gets free content, while the free paper gets free distribution (and a premium customer profile)